The Swiss bank will also pay $150 million to settle lawsuits brought by various US regulators, which claimed it had missold ARS to private investors.
In an announcement late on Friday, UBS said it would start to buy back a total of $8.3 billion in ARS held by private clients in January 2009. Smaller clients - those with less than $1 million in assets at UBS - and charities would be able to sell back their ARS from October 31 this year, and the bank would also provide no-cost loans against the par value of ARS holdings from mid-September.
UBS will then move to buying back the $10.3 billion (at par) of ARS held by institutional investors by June 2010.
The bank will also pay $75 billion to the state of New York and $75 billion to a group of other state regulators, including Massachusetts, to settle lawsuits based on accusations that UBS executives sold ARS to customers even after they knew the securities were heading for illiquidity and drops in value. UBS will make up any losses suffered by customers who sold ARS after liquidity vanished and prices dropped on February 13 this year.
Any further losses from the ARS meltdown will come under arbitration overseen by the US Financial Industry Regulatory Authority, according to an announcement from the Securities and Exchange Commission (SEC), which added: "UBS will not contest liability for its misrepresentations and omissions concerning the ARS." The SEC added that UBS could suffer further fines if it failed to satisfy regulators that it had fulfilled Friday's deal.
UBS said it would take a writeoff of around $900 million in its half-year results tomorrow to represent the cost of Friday's actions.
The news follows the decision by Merrill Lynch and Citi to buy back ARS paper at par value from their retail (but not institutional) clients, affecting an estimated $19.3 billion in ARS. Citi also settled its lawsuits for $100 million.
New York attorney-general Andrew Cuomo welcomed the deals with UBS and Citi, but warned that Merrill Lynch's buyback plan "fails to contain certain investor protection safeguards" and would be reviewed by his office.
See also: Merrill and Citi to repurchase ARS after New York applies pressure
New York sues UBS for alleged auction rate securities fraud
Investors caught short by auction rate meltdown
Auction rates securities investigations gathering steam